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1 If it don t make dollars, does that mean that it don t make sense? 1 Commercial, Nonprofit and Muncipal Child Care in the City of Toronto A report to the Children s Services Division, City of Toronto Dr. Gordon Cleveland, Department of Management, University of Toronto Scarborough April, From grafitti art in my back laneway, City of Toronto

2 Table of Contents Executive Summary and Recommendations. 3 Introduction...16 TERMINOLOGY 17 Review of Relevant Studies on Commercial and Nonprofit Care..18 THE PUBLIC INTEREST IN CHILD CARE..19 THE DIFFICULTY OF ASSESSING QUALITY.19 EMPIRICAL EVIDENCE ABOUT CHILD CARE AUSPICE..23 CONTESTING VIEWS..25 Analysis of Data from the City of Toronto, DESCRIPTION OF SAMPLE 26 CITY OF TORONTO S OPERATING CRITERIA..27 NUMBER OF AGE GROUPS IN CENTRES..29 BUILDINGS.30 SIZE..31 QUALITY SCORES 31 INPUTS TO CHILD CARE QUALITY 32 BUDGET AND REVENUE...34 DETERMINANTS OF QUALITY...36 BEYOND THE INPUT AND EXPENDITURE DIFFERENCES, DOES NONPROFIT STATUS MATTER? GEOGRAPHIC DIFFERENCES MULTIPLE-UNIT COMMERCIAL OPERATIONS...43 COMPARING QUALITY IN TORONTO TO OTHER JURISDICTIONS...43 SUMMARY AND CONCLUSIONS OF DATA ANALYSIS.44 Australian Child Care and ABC Learning Centres 46 Child Care Policies in Canada and the role of the NAFTA agreement..47 Conclusions. 51 Recommendations for Action By the City of Toronto...53 References 56 Appendix A Details on Operating Criteria 2

3 EXECUTIVE SUMMARY AND RECOMMENDATIONS 1. In the latter half of 2007, there was considerable public concern and media coverage about the possibility that a multinational corporate child care chain was actively engaged in a campaign of purchasing Canadian child care centres. This company, ABC Learning - an Australian-based multinational, had established a dominant position in the Australian child care market in less than a decade of existence, dramatically changing the proportions of nonprofit and for-profit child care in that country. Concerns have been expressed in Australia and Canada about the effects of this development on: a. the quality of child care provided to children, b. on community orientation of and parental involvement in that child care, and c. on the ability of governments to effectively regulate and develop policies to affect large and powerful corporate child care providers. 2. In this context, a number of Ontario municipalities, because of their role as child care service managers, have been anxious to ensure that they would have adequate tools to control child care developments within their boundaries. The City of Toronto has, since December 2004, had a policy that new purchase-of-service agreements with child care providers would only be established with not-for-profit operators. In October 2007, the City of Greater Sudbury passed a similar motion, restricting future purchase-of-service agreements to nonprofits (while grandfathering arrangements with existing for-profit providers). The City of Ottawa also has such a policy. The Region of Peel, in January 2008, approved a 12-month moratorium on new purchase-of-service agreements with for-profit operators. 3. This report, commissioned by the Children s Services Division: (a) reviews the theoretical and empirical literature on commercial and nonprofit child care services; (b) analyzes data from commercial, nonprofit and public child care services in the City of Toronto, focusing on issues of quality; (c) reviews evidence from other countries on the behaviour and performance of large corporate child care chains; (d) recommends appropriate policies for the City of Toronto related to commercial and non-profit child care (including large chain commercial providers). 4. In theory, and to a reasonable extent in practice, when competitive markets are working well, they compel producers to serve the public interest by providing goods and services that are efficiently produced, of reasonable quality, and at prices that are close to costs. However, child care markets fail to perform like this, for two reasons. First is the existence of a public interest in child care. Second is the 3

4 inability of parents to make perfect judgements about the quality of child care on offer. 5. There is a public interest in high quality child care because the principal determinant of the effects of early childhood education services on children is the quality of this care, especially the nature of the child-caregiver/teacher interactions. There is a public interest in the amount of child care used because child care s availability can substantially affect the ability of mothers of young children to maintain labour force attachment. 6. Quality is a multi-dimensional construct that includes the richness of the environment, the availability of toys, learning materials and physical space, and more, but especially includes the supportive character of the interactions between caregivers and children. Developmental psychologists and child care experts have created instruments that attempt to measure the essence of child care quality, for instance, the Early Childhood Environments Rating Scale and the Infant-Toddler Environments Rating Scale. Child care classrooms can be rated using these scales when a trained observer spends at least half a day per classroom observing interactions, checking materials, program planning, health and safety practices, and a range of other items. Ratings on these and other items are averaged to get an overall score for the classroom. Quality as measured by these and other scales has been shown to have consistent correlations with concurrent and later measures of child development. 7. It is difficult for parents to accurately evaluate quality in a child care facility. The principal consumer is their child, and children s judgements can be fickle and unreliable. Parents spend only a small amount of time in their children s child care facilities, and the parts of quality that are most important interactions are both difficult to judge and are likely to be affected by the parent s presence. 8. The best empirical evidence we have about parent child care choices comes from the Cost Quality and Child Outcomes Study (CQCO) in the U.S. In empirical tests, parents are found to very substantially overestimate the actual quality level of the services their children use. Since parent evaluations do not distinguish gradations in quality between mediocre and good quality care, a market for lemons is likely to prevail in child care markets. In other words, since parents cannot accurately perceive gradations in quality above a certain level, and since higher quality services cost more for an operator to provide, it will not be worthwhile for most commercial providers of care to try to offer quality beyond the mediocre level. This market result is problematic because it is higher levels of child care quality that are consistent with positive or optimal child development. This failure of child care markets creates an important potential role for nonprofit and public institutions in providing quality child care. 4

5 9. Henry Hansmann, an economist, argued that nonprofits develop when "contract failure" makes market production unattractive. By this Hansmann meant that a variety of problems might make it difficult for the consumers of a particular commodity to police the conduct of producers by normal contractual or market mechanisms. Because nonprofits must retain and use their surplus earnings (if any), nonprofit firms have less incentive to take advantage of consumers than do managers of a for-profit firm. 10. Because various aspects of the quality of child care (e.g., health and safety, developmental benefits) are desired by both governments and parents, but are difficult to accurately observe and monitor, this literature would predict that nonprofit child care centers should have a demand-side advantage in providing higher quality care. This nonprofit demand advantage should be reflected in increased devotion of inputs to the production of higher quality and could imply a productivity advantage in producing quality services. 11. There is good evidence that nonprofit child care organizations do, on average, hire a different mix of inputs than for-profit centers and provide higher quality services. In particular, staff-child ratios, early childhood training levels of staff and wage and benefit compensation of staff are found to be higher in nonprofits in nearly every study. If there is a difference in group sizes, formal education of staff, and education level of center directors, it favors nonprofit centers, but these differences are not always significant. Similarly, on measures of process quality (global observational measures of classroom quality or measures focused on child-caregiver interaction), nonprofits always either have, on average, significantly higher quality or there is no difference. 12. Researchers in Canada and other countries generally find that nonprofit centers produce higher quality services. For example, Mitchell (2002) suggests that forprofit centres in New Zealand hire staff with lower educational levels. Mill, Bartlett and White (1997) report on a survey of centres in Montreal, Quebec that showed that for-profits had higher fees and generally lower quality. The authors argue that this is due to for-profits diverting resources to profits. Lyon and Canning (1999) report on a sampling of centres in Canada s four Atlantic provinces in which they found consistently higher quality (measured by ECERS scores) among larger nonprofits. Prentice (1997) cites general findings in Canada that nonprofits supply better quality, and are more likely to meet regulatory standards. She suggests that the policy issue concerns more than just quality, since for-profit centres serve as a lobby group for lower regulatory standards. 13. Doherty, Friendly and Forer (2002) explore the differences between nonprofit and commercial child care centres using the You Bet I Care data set. They identify two 5

6 broad explanations of observed quality differences: that nonprofit centres have greater access to government funding and donated resources, and that there are differences in goals, structures and characteristics between nonprofit and commercial centres. They only look at data from provinces and centres without government or donated resource differences and still find important quality differences by auspice. However, in a province with low average incomes and therefore uniformly low prices of child care (New Brunswick), quality rankings by auspice are very similar. 14. Cleveland and Krashinsky (2005), looking at the You Bet I Care data from Canada, find consistent differences on average between nonprofit and for-profit centres, even when controlling statistically for resource and input differences. When the data set is divided into thick and thin markets, it becomes clear that there are especially large nonprofit quality advantages in thick markets. However, the nature of competition in thin markets changes the role that nonprofit centres typically play, encouraging them to produce lower quality services. Cleveland, Forer, Hyatt, Japel and Krashinsky (2007), using four different Canadian data sets, find strong patterns of nonprofit superiority in producing quality child care services across all the data studied. 15. Not everyone is convinced that nonprofit child care organizations play a positive role. Even if nonprofit firms are more likely to deliver good quality services, the issue remains of whether nonprofit institutions act in an efficient manner - that is, whether they respond to consumer demand, minimize costs, and produce the optimal level of quality. Preston (1988) suggests that nonprofit organizations may pay higher wages to staff, without a compensating improvement in the quality of teaching services provided, and Mocan and Tekin (2003) find some support for this hypothesis. This is similar to the concerns expressed by Lefebvre (2004) about rising staff compensation levels in Quebec. 16. The City of Toronto has been a leader in supportive provision of child care services for over thirty years. It is the largest provider of child care services in Canada with the exception of the province of Quebec. The City has recognized its unique role in supporting families to provide child care high quality child care for families with two parents or sole support parents in the workforce and for children who can benefit from a caring environment. This role has included managing, planning and organizing the delivery of services, providing purchase of service agreements with centres to make subsidies available to eligible families, providing grants to support wages, equipment, playground and maintenance costs, providing an enhanced regulatory environment to improve the quality of services, funding child care development through capital assistance and providing compensation to school boards in lieu of rent for child care centres located in schools. 6

7 17. Analysis of data collected by the City of Toronto in 2007 from nearly all municipal centres and nearly all centres having purchase-of-service (i.e., to provide subsidized child care spaces) agreements with the City provides evidence of a nonprofit advantage in producing quality child care services. There are data on 644 child care centres having nearly 40,000 spaces. Commercial centres provide 21% of spaces; nonprofits provide 74%; municipal centres provide 7%. There are another 264 centres, with nearly 12,000 spaces, on which we do not have any data about quality, because these centres do not have purchase-of-service agreements with the City. 18. Centres with purchase-of-service agreements and directly-operated centres are evaluated annually using a set of Operating Criteria that can be interpreted as, and are intended as, measures of quality. The Operating Criteria assess a wide range of factors that are specific to the classroom in which children spend their days (infant, toddler, preschool and schoolage classrooms). In this report, we focus on two possible measures of quality. One is a global measure at the classroom or age group level (that we call Classroom Quality ) and the other focuses on the quality of interactions between caregivers/teachers and children (that we call Interaction Quality ). 19. The Operating Criteria have face validity in the sense that the items that comprise our quality scores are similar to those used in constructing the Early Childhood Environments Rating Scale, the Infant-Toddler Environments Rating Scale, and other widely-used measures. However, the City of Toronto s Operating Criteria have not been formally validated as child care quality measures. To increase our ability to compare quality results with other data sets, we have turned the Operating Criteria scores into percentages. These Operating Criteria are agegroup-specific. The data set, therefore, does not consist of observations on 644 centres, but rather consists of observations on 1427 age groupings (201 infant groupings, 308 toddler groupings, 572 preschool groupings and 346 schoolage groupings). 20. Table 3 in the body of this report shows average quality scores for commercial, nonprofit and municipal centres, for each age group (infants, toddlers, preschool, schoolage), and for each section (or subscale) of the Operating Criteria. Several patterns are obvious and notable. First, the average scores on every scale in commercial centres for infant rooms, toddler rooms, and preschool rooms are below those of nonprofit centres (5-6 percentage points lower), and the scores on every scale are virtually always higher in municipal centres (5-8 percentage points or more). Second, the gap between nonprofit classrooms and for-profit classrooms is wider for Interaction Quality than for other measures of quality. Third, the school age classrooms infrequently show significant differences between commercial and nonprofit centres. However, municipal child care for schoolage children is consistently higher in quality than either commercial or nonprofit classrooms. It is 7

8 possible that the schoolage category contains a somewhat heterogeneous mix of established and less-established programs. 21. The data analysis summarized in this report does paint a fairly consistent picture of differences between nonprofit and commercial child care in the City of Toronto. We can summarize the broad picture from this data analysis in the following points: (a) Average quality in nonprofit classrooms, whether measured by Classroom Quality or Interaction Quality, is consistently higher in infant, toddler and preschool rooms than in corresponding age groups in commercial centres. Interaction Quality is significantly higher in nonprofit classrooms for schoolage children, but not Classroom Quality. Care in municipal centres is better everywhere. (b) For infant, toddler and preschool classrooms, nearly all of the potential inputs to quality are significantly higher in nonprofits. The pattern is mixed for the inputs to quality in schoolage classrooms. (c) Classrooms in nonprofit centres get more of their revenue from parent fees, and less from subsidies to lower-income families; commercial centres in the City of Toronto tend to specialize in the provision of service to subsidized families. Expenditures on teaching staff are higher in nonprofit classrooms, and so are total expenditures, in general. However, for centres with schoolaged classrooms, commercial centres have higher levels of total expenditure per child per day. (d) Correlation coefficients indicate statistically significant relationships between the two measures of quality and a number of potential determinants of quality (i.e., inputs to quality). These include the percent of teaching hours provided by ECE-qualified staff, the hourly wages of ECE-qualified staff, the percent of children receiving subsidy, the percent of revenue coming from parent fees, and benefits as a percent of salary. Total expenditure in the centre per child per day has positive effects on Classroom Quality, but does not generally affect Interaction Quality (except for infants). Clearly, the differences in input amounts and input choices of nonprofit centres contribute to their quality advantage over commercial centres. (e) Regressions that statistically control for differences in the amount of financial resources available to centres, or for the teaching inputs used in classrooms, find that nonprofit status generally makes an independent contribution to quality beyond differences in financial 8

9 resources or input amounts. The size of this independent nonprofit quality advantage is typically 3-6 percentage points on Classroom Quality and 4-9 percentage points on Interaction Quality. (f) Comparing these results, in percentage terms, to those found in other jurisdictions, it would appear that average quality in Toronto is higher and the spread between commercial and nonprofit scores is somewhat narrower than elsewhere. The obvious conclusion is that extra monitoring and regulation of purchase-of-service centres done by the City of Toronto has some impact on centre quality. However, because the instruments used to measure quality in Toronto (items from the Operating Criteria) are different than those used in other jurisdictions, this comparison is inexact and, necessarily, tentative. 22. There are a number of worthy questions that this data can address, but that are beyond the scope of this report. These remain as potential topics for research: - the interrelation between the multiple determinants of quality of services in child care centres in Toronto (what are the tradeoffs; what is the relative contribution of different inputs to quality?) - the role of geography and income in affecting the production of quality services, including the role of high need areas, and areas in which there are substantial numbers of lower income families - the puzzle of services for schoolage children, where many potential determinants of quality do not appear to play as important a role as might be expected, and where services in nonprofit classrooms are of lower quality than in classrooms for other age groups - the determinants of quality in directly-operated municipal centres (some data on inputs are not currently available to include these centres in the analysis) - including other aspects of the Operating Criteria in the measures of quality: for instance, outdoor playground equipment, the nutrition and provision of food to children, the administration of the various policies and procedures involved in operating the centre, the soundness of financial record-keeping and planning, and the integration of this child care service with other child and family services in the community. 23. ABC Learning Centres is the largest for-profit provider of child care in Australia and the largest corporate child care chain in the world. Since listing on the Australian stock market in 2001, ABC Learning has bought out most of its corporate rivals in that country as well as many small community and individual individualoperator services. ABC Learning is estimated to provide at least 30% of all child care spaces in Australia, including 50% or more in the State of Victoria and in the Prime Minister s home state of Queensland. In early 2008, ABC also owned substantial 9

10 numbers of child care centres and related businesses in the United States, the United Kingdom, and New Zealand, and was apparently considering entry into Canada. 24. How did this happen? Key to the expansion and profitability of ABC Learning and other private for-profit corporations in Australia was the change in government funding mechanisms from In the late 1990 s, the operational funding provided to long day care programs directly by the Commonwealth (i.e., federal) Government was changed to the Child Care Benefit (CCB), a fairly generous (now covering families earning up to about $108,000 annually) means-tested subsidy paid in advance to long day care centres on behalf of parents. In addition to the CCB, the Commonwealth Government also provides a child care tax rebate (CCTR) for 30% of the remaining out-of-pocket child care expenses to families. The recently-elected Australian Labour Party has promised to increase this tax rebate from 30% to 50% of out-of-pocket child care costs. 25. These funding mechanisms, with few strings attached to guarantee quality performance or to keep prices affordable, have created very significant profit opportunities. ABC Learning has reported that fully 40% of its revenues come from government subsidies; It reported a net profit of $37.1 million for fiscal year ended December 31, Child care fees are high by Canadian standards. Across all centres and age groups the average price of care is over $50 per day. In major metropolitan areas, prices of $60-$100 per day are common, resulting in a substantial amount of part-time use. 26. Regulations in Australia are lower than is typical in Canada, and commercial lobbying efforts ensure that changes are slow. For example, staff:child ratios in most states are 1:5 for infants and toddlers; 1:10 for preschoolers; and 1:15 for over 4 s. Most states and territories do not require teacher qualifications for long day care centre staff. The National Childcare Accreditation Council, established in 1993, administers the Child Care Quality Assurance system. Because centres must be accredited to be eligible for CCB and CCTR payments, the government believes that this mechanism assures quality. Although the accreditation guidelines look good on paper, the NCAC has modest monitoring and enforcement capacity, and relies extensively on self-reporting. Invoking commercial confidentiality, the NCAC does not make quality scores of individual centres public (so parents cannot base decisions on evidence about quality), and commercial centres have refused access to centres for academics to do objective studies of quality The growth of commercial and corporate child care in Australia has led in less than a decade to dramatic changes in the character of child care services. A commercial logic rather than a public-service logic now dominates. This is reflected in commercial confidentiality concerns about quality information, extensive lobbying against regulatory improvements, the proprietary character of curriculum plans, and 10

11 the legal effort devoted to defending brand names. ABC Learning Centres has been particularly aggressive in defending its commercial assets and good name. It has been very active in suing people who comment negatively about ABC; in fighting court cases assigning it corporate responsibility for problems in its centres, and in preventing other centres from setting up in close proximity to its own. 28. NAFTA accords foreign investors certain rights as soon as investments are established in Canadian child care service businesses. Most notable is the right to claim damages where it is alleged that government measures effectively expropriate their investments. Because expropriation is broadly defined, a plan by government to establish a publicly funded child care system, where funding is restricted to notfor-profit providers, might be considered to breach the NAFTA prohibition against expropriation. The risk of such claims is proportional to the size of the commercial stake foreign investors have in the sector. 29. A recent legal opinion argues that, governments can allocate public funding in child care services to not-for-profit providers even though the effect is to discriminate against foreign investors because in the NAFTA, Canada established an exemption for certain measures relating to social services: The character of this social services reservation is such that Canadian governments are entitled, not only to maintain existing social service programs and regulations, but to establish new ones. This is true even where such initiatives explicitly restrict the rights of foreign investors or service providers, such as by prohibiting foreign investment in the child care sector. Even so, it is possible that such discriminatory treatment could found a claim for expropriation where the public funding regime was such as to significantly reduce a forprofit provider s market share. But again, this problem can only arise if foreign investors are permitted to establish a significant commercial presence in the child care sector.. For example, if a program of full-day learning for four- and five-year-olds attending junior and senior kindergarten is implemented, this may engage the application of trade rules. The risk of such a claim is proportional to the extent of foreign investment in the sector. 30. In other words, Canadian governments currently have the authority to both prohibit foreign investment in and to exclusively fund nonprofit providers without running afoul of international trade rules. However, if governments fail to use this authority to prevent the establishment of a significant foreign (commercial) investor presence in the sector, they will invite the application of trade rules that limit their future policy and program options. Should this occur, NAFTA investment rules will make it very difficult for governments to reverse course to favour not-for-profit and 11

12 community based child care, and will also render certain forms of child care regulation vulnerable to challenge before NAFTA tribunals. 31. How do governments interested in the expansion of the nonprofit sector provide appropriate support? There are at least two major barriers to the expansion of nonprofit programs: Initial and ongoing access to capital Management and operations support 32. The for-profit sector has the advantage of being able to negotiate loans and mortgages from commercial banks. Most financial institutions are unwilling to lend money on equal terms to nonprofit operators. The City of Toronto has provided capital assistance to some nonprofit centres on a one-off basis. Over the last 10 years, the City has provided capital funding to about 20 new nonprofit child care centres, sometimes in the form of direct assistance, sometimes as loan guarantees or interest-free loans. The City should continue and expand these efforts, and the City should work with the Province to develop a province-wide program of provision of loan capital to nonprofit centres. Any such program should be administered through municipalities (i.e., the Service System Managers) to ensure that capital is allocated to services created in areas where additional quality services are needed. 33. Child care in Canada has been aptly described by the OECD as a patchwork service. Existing programs largely reflect the commitment of community leadership. Sometimes they result from entrepreneurial efforts. In Toronto, the City government has played an important role in the child care planning and development process. In spite of the City s best efforts, community-based child care is often fragile. It is difficult to establish nonprofit early learning and child care programs in new communities, new suburban housing developments or in vulnerable neighbourhoods. 34. The City of Toronto has already played a leading role in development of new child care centres. In particular, the City helped to develop 55 new child care centres in the first round of Best Start funding. This development role should be continued, should be expanded with provincial support, and should be complemented by ongoing operating and management support. The planning and development role is well done by the City. Ongoing operating and management support could reside in the hands of an arms-length agency designed to support community-based, nonprofit child care programs. 35. Such an agency would fill the gaps in the existing child care networks by providing support in the development of boards of directors and the establishment of sound business practices (legal, financial, human resources); promoting physical environments that support quality, accessibility and cost-effectiveness appropriate 12

13 to the community s needs; promoting service planning and effective partnerships to ensure new programs respond to community need and make use of, and are supported by, the capacity within their neighbourhoods; assisting new boards to meet their legal obligations and establish effective business practices; developing quality benchmarks in child care design and service organization and promoting best practice in program content; contributing to the development of child care programs based on best practices. Recommendations 1. The City of Toronto should continue its policy, adopted in 2004, of encouraging the growth of nonprofit child care, by restricting new or expanded puchase-of-service agreements to take place in not-for-profit facilities. 2. The City of Toronto should continue annually collecting Operating Criteria data (and budget and financial data) from centres with which it has purchase-of-service agreements and municipal centres. These data are key to the City s objective of monitoring a wide range of quality-related performance data in child care. There is evidence that this monitoring function is effective in raising the overall level of quality in Toronto centres, relative to those in other jurisdictions. 3. Since there is a public interest in ensuring quality services in centres that do not have purchase-of-service agreements in Toronto, the City should consider means of extending the obligation to report on measures of quality to currently uncovered centres. Initially, this reporting requirement could extend to all service providers that receive rent subsidies, wage subsidies or other public funding. The City could encourage the province to share the costs of this extension and to collect similar data from centres across the province as a means of carrying out their regulatory, licensing and monitoring functions. 4. The Operating Criteria apparently serve their monitoring function reasonably well. However, their status as accurate measures of child-development-related quality has not been validated. The City should have these Criteria validated, adapting them as necessary for this purpose (e.g., the pass mark may change, or they may be measured on a 5-point instead of a 4-point scale). This has become more important with the decision to publish Operating Criteria on the web site and have them posted in centres. The City could use this occasion to confirm that parents also care about the same measures of quality when considering items that promote child development. 5. The City of Toronto should encourage the Province of Ontario to follow municipal leadership in evolving the current hodge-podge child care system in the province into a more coherent and integrated system of nonprofit and public providers. Amongst other policy changes, this would require the province to declare, as Toronto has, that future developments will occur in the nonprofit and public sectors, and that the for-profit child 13

14 care sector in the province will be grandparented into a gradually declining role. The objectives of this policy would be to enhance child care quality, and, in the context of NAFTA, to preserve the ability of the province to establish full-day junior and senior kindergarten, or other innovative early childhood education policies. In other words, the child care system would serve public purposes, as the schools, hospitals and universities do now, through a network of nonprofit or public organizations. The funding would come, as with schools, hospitals and universities, from taxpayers and consumers. 6. In the next few years, as this policy becomes established, the Province of Ontario should, and the City of Toronto should encourage the Province to, pay special attention to monitoring and controlling the issue of new child care licenses and the transfers of existing licences, so that large for-profit child care chains are not able to get established in this province, and so its policy flexibility under NAFTA is maintained. 7. The City of Toronto should encourage the Province of Ontario to favour conditional supply-side funding over unconditional demand-side funding in its efforts to develop the child care system in Ontario. Supply-side funding (directly to programs) confers greater ability to compel regular reporting, monitor performance and encourage the provision of higher quality programs. 8. Because of the difficulties nonprofit programs have in gaining access to capital for expansion and new development, the City of Toronto should regularize the capital and development assistance to new nonprofit centres that they currently provide on an irregular basis. Further, the City should encourage the Province of Ontario to mandate (and financially support) Service System Managers to develop capital assistance programs to encourage the development of nonprofit child care services across the province. Nonprofit centres need assistance with access to capital on favourable terms; assistance with forecasting and planning activities necessary at the early stages of setting up child care. These type of supportive programs for nonprofit agencies are particularly important when governments are under pressure to increase child care supply rapidly. It is precisely at these times that for-profit child care can develop rapidly, making use of generous public funding, while nonprofits are slower off the mark 9. Further, the Province of Ontario should mandate (and financially support) Service System Managers to make provision for ongoing management and operating advice and assistance, especially to independent nonprofit centres. This recommendation responds to the weaknesses that independent nonprofit operators have in setting up, managing, and operating efficient, high quality, parent- and child-friendly services; assistance with human resource, benefit and compensation planning and negotiation; assistance with developing and mounting professional development programs; assistance with joint purchasing, program and curriculum planning, record-keeping and other activities that lower costs of operation and improve efficient management of high quality nonprofit child 14

15 care services. It may be efficient to have this ongoing management and operating assistance provided through a sector-based arm s length agency. 10. Classrooms in municipal centres are virtually always of higher quality than in other centres. More analysis of the determinants and costs of higher quality care in municipal centres is warranted. In the meantime, the City of Toronto should remain strongly committed to maintaining these centres and preserving their important role of providing high quality education and care services, particularly for subsidized children. 15

16 Introduction 1. In the latter half of 2007, there was considerable public concern and media coverage about the possibility that a multinational corporate child care chain was actively engaged in a campaign of purchasing Canadian child care centres. This company, ABC Learning - an Australian-based multinational, had established a dominant position in the Australian child care market in less than a decade of existence, dramatically changing the proportions of nonprofit and for-profit child care in that country. Concerns have been expressed in Australia and Canada about the effects of this development on: a. the quality of child care provided to children, b. on community orientation of and parental involvement in that child care, and c. on the ability of governments to effectively regulate and develop policies to affect large and powerful corporate child care providers. 2. In this context, a number of Ontario municipalities, because of their role as child care service managers, have been anxious to ensure that they would have adequate tools to control child care developments within their boundaries. The City of Toronto has, since December 2004, had a policy that new purchase-ofservice agreements with child care providers would only be established with notfor-profit operators 2. In October 2007, the City of Greater Sudbury passed a similar motion, restricting future purchase-of-service agreements to nonprofits (while grandfathering arrangements with existing for-profit providers). The City of Ottawa also has such a policy. The Region of Peel, in January 2008, approved a 12-month moratorium on new purchase-of-service agreements with for-profit operators. 3. At the beginning of December 2007, the Children s Services Advisory Committee of the City of Toronto asked the Children s Services Division to report on the issues raised by these concerns and to make possible recommendations for action. As part of its response, the Children s Services Division approached me to write a paper that would do several things, including: (a) review the theoretical and empirical literature on commercial child care services and other evidence of the experience with commercial child care in different jurisdictions, focusing especially on the quality of those services, the use of inputs which generally predict quality, and the use of financial resources; (b) using data collected by the City of Toronto, analyze the relationships between nonprofit, commercial or municipal auspice of the child care centre and quality (as measured by the Operating Criteria), staff wages, benefits, and other factors, including budget and financial data. 2 The City had already removed the profit line from purchase-of-service budgets in the early 1990 s. 16

17 (c) (d) (e) (f) contrast, where possible, City of Toronto results with results from other jurisdictions through review of relevant literature on child care and auspice as well as a review of the City s own data; review evidence on the behaviour and performance of multinational chains and comment on the opportunity for such programs to establish themselves in Ontario and the City of Toronto; include the Consultant s observations about appropriate policies for the City of Toronto related to commercial and non-profit child care (including large chain commercial providers); and include the Consultant s recommendations concerning policy and practices for consideration of the City s Children s Services Advisory Committee. TERMINOLOGY 4. The word auspice is frequently used in Canada to refer to the ownership and management situation of child care facilities. Amongst child care centres, there are three broad types of ownership and management structure (or auspice): public, nonprofit and for-profit. Ontario is the only province with public preschool child care facilities 3 many municipalities directly operate child care centres, typically with an orientation to providing very good quality care for families, many of whom have low incomes. In the data set analyzed in this report, there are 54 municipal child care centres. 5. About 80% of the child care centres in Canada are nonprofit (sometimes called not-for-profit). Nonprofits are heterogeneous. Many nonprofits have a community base of some kind e.g., started by a church, community centre, YMCA, by a college as part of its teaching program, etc. Most nonprofits are not administered as part of a large multiple-unit operation, but are either stand alone or nearly so. 6. Commercial child care operations are also heterogeneous. Nearly all centres are incorporated, to reduce personal liability for loss or damages. However, while many are stand alone centres with a single owner, others across Canada are part of a small or large chain of child care centres. 7. None of the current child care centres in Toronto are owned by corporations listed on the stock exchange, with dispersed ownership. The largest chain operating in Toronto has only 9 purchase-of-service centres. As a result, while the analysis of current child care data from the City of Toronto can shine a light 3 Of course, public kindergartens provide education and care services that are somewhat similar to that provided in good quality child care centres, but we do not consider kindergartens in this report. 17

18 on differences between commercial, nonprofit and public (municipal) child care, it cannot provide direct information about the operations of companies like ABC Learning Centres Ltd. (publicly-traded child care corporations) Review of Relevant Literature and Studies on Commercial and Nonprofit Care 8. There is a considerable theoretical literature, especially in economics, on the role of nonprofit organizations in market economies, and a growing empirical literature analyzing the differential performance of nonprofit and commercial child care operators in market economies. However, there is only a small amount of, mostly quite recent, academic and policy literature on what is often misleading called corporate child care (by which is really meant the role of large corporate child care chains, often publicly-traded on share markets, and sometimes multinational). 9. Our economy, like most others around the world, is a capitalist market economy. Most goods and services are produced by private corporate firms or unincorporated privately-owned firms. Some of these corporations are publicly traded on stock exchanges, so that their ownership is potentially widespread, and separate from management of the company. The objective of most firms is to make profit for the shareholders or owners, but in order to do that, they must successfully produce and sell a good or service that consumers will voluntarily buy. Because, in most markets, firms are in competition with other firms, each one is pressured to make its product more attractive (lower price, better design) to buyers. When competitive markets are working well, they compel producers to serve the public interest by providing goods and services that are efficiently produced, of reasonable quality, and at prices that are close to costs. 10. Economists have studied carefully the conditions under which this parable about competitive markets becomes reality. In markets where these particular conditions are absent, or weak, there is market failure, and, potentially, government action or institutional innovation may help to remedy these sources of market failure. 11. So, for instance, when there are very substantial economies of scale in an industry, a single producer may be able to gain a cost advantage over all competitors, leading to a situation known as natural monopoly. In these circumstances, competition is not effective in disciplining the producer to serve the public interest. Either public ownership or regulation of the natural monopoly industry may be appropriate, or institutional changes to promote competition. 18

19 12. Child care markets may not be characterized by substantial economies of scale, but there are problems that can make these markets fail. Fundamentally, there are two reasons. First is the existence of a public interest in child care (sometimes described as external benefits of child care benefits in addition to those received by the direct purchaser). Second is the inability of parents to make perfect judgements about the quality of child care on offer, sometimes known as the problem of information asymmetry, because consumers have less information about actual quality of services than do producers. THE PUBLIC INTEREST IN CHILD CARE 13. There is a substantial public (i.e., collective or social) interest in the effects of child care on children and families. For most other goods and services sold in the market, the public interest is well served if consumers get the quality and amount of the good they can afford (no matter what that quality and amount are), as long as there is competition amongst suppliers. However, for early childhood education and care (of which child care is a part), both the quality of the service and the amount traded are of public interest in and of themselves. There is a public interest in high quality because the principal determinant of the effects of early childhood education services on children is the quality of this care, especially the nature of the child-caregiver/teacher interactions. There is a public interest in the amount of child care used because child care s availability can substantially affect the ability of mothers of young children to maintain labour force attachment. So, the results, not just the process, are of public interest in this market. THE DIFFICULTY OF ASSESSING QUALITY 14. Quality is a multi-dimensional construct that includes the richness of the environment, the availability of toys, learning materials and physical space, and more, but especially includes the supportive character of the interactions between caregivers and children. It is difficult for parents to accurately evaluate quality in a child care facility. The principal consumer is their child, and children s judgements can be fickle and unreliable. Parents spend only a small amount of time in their children s child care facilities, and the parts of quality that are most important interactions are both difficult to judge and are likely to be affected by the parent s presence. Economist James Walker (1991) has written that The lack of perfect information is the most striking difference between the child care market and the idealized perfect market.consumers do not know the quality of care offered by providers once identified. Even after a long period of use, consumers will not be fully informed about the behaviour of the provider. (p. 65). 15. Developmental psychologists and child care experts have created instruments that attempt to measure the essence of child care quality, for instance, the Early 19

20 Childhood Environments Rating Scale and the Infant-Toddler Environments Rating Scale. Child care classrooms can be rated using these scales when a trained observer spends at least half a day per classroom observing interactions, checking materials, program planning, health and safety practices, and a range of other items. Ratings on these and other items are averaged to get an overall score for the classroom. Quality as measured by these and other scales has been shown to have consistent correlations with concurrent and later measures of child development. 16. The best empirical evidence we have about parent child care choices comes from the Cost Quality and Child Outcomes Study (CQCO) in the U.S. (Helburn, 1995; but see also Browne Miller, 1990; Cryer, 1989; Fleming, 1989; and Shinn, Phillips, Howes, Galinsky and Whitebook, 1990). The CQCO study used ECERS and ITERS scales to measure actual observed quality in preschool and infant-toddler classrooms in 400 centres in 4 U.S. states. In addition, they asked parents of children in those classrooms to complete a parent-friendly observation questionnaire about exactly the same items included in the ECERS and ITERS scales. 17. Naturally, parents are anxious to assess these quality-related items in their decisions to patronize one centre rather than another. However, in empirical tests, parents are found to very substantially overestimate the actual quality level of the services their children use. Debby Cryer and Margaret Burchinal (1997) compare the parent evaluations in CQCO to the professional evaluation of child care quality in those classrooms. Typically, the professional scores, item by item, averaged about 3 or 4 (mediocre quality). The parent scores on the same items are mostly 6 s and some high 5 s (good to very good quality). Cryer and Burchinal found little ability of parents to identify lower quality practices in child care centres. 18. Naci Mocan (2001), an economist at University of Colorado, analyzed the data from this study using different techniques. He concluded that generally when an item reached 4.1 on the ECERS or ITERS scale (mediocre quality), parents would, on average, rate it as a 7 on the same scale (excellent quality; top of the scale). Naturally, when an item was a 4.2 or 4.3 or 5.4, it also received a rating of 7 from parents. Mocan concluded that parent evaluations did not distinguish gradations in quality between mediocre and good quality care. Under these circumstances, a market for lemons is likely to prevail in child care markets. In other words, since parents cannot accurately perceive gradations in quality above a certain level, and since higher quality services cost more for an operator to provide, it will not be worthwhile for most commercial providers of care to try to offer quality beyond the mediocre level. This market result is problematic 20

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